Short-termism, long-termism, and regulatory focus in venture capitalists' investment decisions

Dmitry Khanin and Ofir Turel

Venture Capital, 2012, vol. 14, issue 1, 61-76

Abstract: Short-termism and long-termism are characterized in the literature as suboptimal intertemporal trade-offs defined, respectively, as prioritizing the short term over the long term (to the detriment of the long term) and prioritizing the long term over the short term (to the detriment of the short term). Advancing this perspective, we argue that short-termism and long-termism could be approached as opportunistic strategies utilized by agents to earn private benefits at the principal's expense. Venture Capitalists (VCs) may use either of these strategies to take advantage of limited partners and entrepreneurs. How can principals detect opportunistic tendencies on the part of VCs as agents? We argue that the principals can do so by examining the effect of the two suboptimal intertemporal trade-offs on VCs’ investment proclivities. Thus, we contend that short-termism amplifies VCs’ eagerness to invest whereas long-termism magnifies VC's eagerness to provide follow-on investment. Counterintuitively, short-termism may also augment long-termism but only under promotion and not prevention framing. Hierarchical linear modeling analysis of the data from a survey of 50 US-based VCs provided support for all the proposed hypotheses.

Date: 2012
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DOI: 10.1080/13691066.2012.666072

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